Court Hawk
Puerto Rico

Puerto Rican Board Defended by Supreme Court in a Blow to Hedge Funds

A financial board created to help Puerto Rico reorganize its debts has been deemed constitutional by the Supreme Court. The court ruled that the Financial Oversight and Management Board, which was created after Puerto Rico stated it was unable to pay its debts, is lawful and can continue operating.

The case in question was brought on by hedge funds and a Puerto Rican labor organization. The plaintiffs argued that the board was unconstitutional, as its members don’t require Senate confirmation. However, the Supreme Court found that, since their responsibility is local, not federal, there is no need to have the members confirmed by the Senate.

Financial Oversight and Management Board

The Financial Oversight and Management Board was created by Congress in 2016 in order to help stabilize Puerto Rico’s financial situation. Puerto Rico, a territory of the US, declared bankruptcy in 2018, but the board has continued to help consolidate the territory’s debts. The board has overseen sweeping changes in government fiscal policy since its creation.

Notably, the board has already overseen decisions regarding over $100 billion in debt owed by Puerto Rico. In September, the board released further plans to restructure some $35 billion of the territory’s debts. So far, the board has been deemed by many to be doing an exceptional job in helping the territory course-correct.

Constitutionality Challenge

The constitutionality of the board was challenged in court by a number of hedge funds and a Puerto Rican labor organization. The plaintiffs in the case insisted that, per the Constitution, any federal appointee must be approved by the Senate. The board, however, is selected when six members are chosen by Congress and one is appointed by the president.

An eighth, non-voting member is then selected by the governor of Puerto Rico. According to the plaintiffs, this process violates the Appointments Clause of the Constitution. A federal appeals court upheld the plaintiff’s view, stating that the board was unconstitutional.

Supreme Court Challenge

The Supreme Court, however, found differently. Stephen Breyer, writing for the opinion, found that the officers of the board had responsibilities that were primarily local. Since they aren’t formally officers of the United States, Breyer wrote, “the Appointments Clause does not dictate how the board’s members must be selected.”

Notably, some legal scholars predicted such an outcome due to the nature of the Appointments Clause. Since Puerto Rico is a territory, it was highly unlikely that officers of its boards could be considered federal officers.